Feb. 12 (Bloomberg) -- Bank of England Governor Mark Carney
underscored his pledge to keep interest rates at a record low in
a recasting of forward guidance to combat persisting slack in
the British economy.

“The first phase of guidance gave businesses confidence
that bank rate would not be raised at least until jobs, incomes
and spending were growing at sustainable rates,” Carney said in
London as he published the central bank’s quarterly Inflation
Report. “As guidance evolves, that remains the case: the
Monetary Policy Committee will not take risks with the
recovery.”

The BOE raised its growth forecasts today, prompting
investors to increase bets for higher rates even as Carney tries
to reassure Britons that borrowing costs will stay at 0.5
percent for some time. Other central banks including the Federal
Reserve are also refining their forward guidance as they try to
secure sustainable recoveries for their economies.

The BOE now reckons that unemployment fell to the 7 percent
threshold for its original guidance in the quarter through
January. In the Inflation Report, BOE officials also estimated
an output gap at 1 percent to 1.5 percent of gross domestic
product as they provided more detail on the factors that will
influence their decisions.

The MPC “is for the first time today providing guidance
that it is seeking to absorb all the spare capacity in the
economy over the next two to three years,” Carney said. “That
recognizes that spare capacity is both wasteful and increases
the risk that inflation will undershoot the target” of 2
percent.

Jobless Level

Carney set the 7 percent jobless level to consider an
interest-rate increase when he introduced guidance in August.
While unemployment has fallen faster than officials expected,
prompting questions about the policy’s credibility, the BOE is
maintaining its push to convince households and businesses that
higher interest rates are still some way off.

Fine-tuning guidance isn’t unique to the BOE. The Fed, now
led by Chairman Janet Yellen, hedged the labor-market threshold
in its guidance in December, saying that the benchmark lending
rate is likely to remain around zero “well past the time that
the unemployment rate declines below 6.5 percent.” Fed Bank of
Atlanta President Dennis Lockhart said this month they may even
reduce that marker. European Central Bank President Mario Draghi
last month strengthened a pledge to keep rates low for as long
as necessary.

U.K. Forecasts

In its report, the BOE said it expects fourth-quarter GDP
growth will be revised up to 0.9 percent from the 0.7 percent
estimated by the statistics office. It forecast a similar pace
of expansion this quarter. For the full-year 2014, it raised its
projection to 3.4 percent from 2.8 percent in November.

The pound strengthened after the bank released its
forecasts. It was up 0.4 percent at $1.6517 as of 12:44 p.m. in
London. Short-sterling futures contracts fell, indicating
traders are adding to bets for higher rates. The implied yield
on the contract expiring in December climbed 4 basis points to
0.76 percent, with the March 2015 contract up 6 basis points at
0.93 percent.

While the BOE offered an upbeat outlook, saying it expects
the recovery to become “more entrenched and more broadly
based,” it added that any rate increases are likely to be
gradual.

“We are serene about where the stance of monetary policy
should be,” Carney said. “Serene but not complacent.”

Rate Peak

The MPC also offered borrowers further comfort about rates
as the economy strengthens, saying they are unlikely to rise as
high as they did before the financial crisis struck.

“The legacy of the financial crisis and the persistence of
economic headwinds mean that interest rates may need to remain
at lower levels for some time to come,” the BOE said. “Even
when the economy has returned to normal levels of capacity and
inflation is close to the target, the appropriate level of bank
rate is likely to be materially below the 5 percent level set on
average by the committee prior to the financial crisis.”

On inflation, the BOE lowered its projections throughout
the forecast period, reflecting smaller-than-expected increases
in utility prices and a stronger pound. Sterling has risen about
6.5 percent against the dollar in the past six months.

Based on investors’ expectations for interest rates, with
the first increase seen coming in April 2015, the central bank
sees inflation at 1.9 percent in three years, below its goal.

“The inflation environment is more benign than we had
anticipated,” Carney told reporters, citing subdued global
prices, falling commodity costs and a strengthening of the
pound. “All of these developments will hold back imported
inflation pressures that have to a great extent explained the
above-target inflation over the past five years.”

The BOE sees inflation slowing to as low as 1.7 percent in
the second quarter of 2015, based on market interest-rate
expectations. It will gradually accelerate after that, reaching
1.9 percent in 2016 and staying around that level.